With the phase one trade deal with China finally signed, there should be less uncertainty, which will boost the economy. The question becomes will China adhere to the pact and whether the dispute resolution mechanism will be effective.
“Trade issues caused market gyrations last year and to the extent that the phase one deal with China reduces uncertainty, it should help U.S. businesses in sectors impacted by tariffs and give them more confidence to invest in their future growth,” according to Tony Bedikian, managing director and head of global markets at Citizens Bank.
“Its full impact will depend on how the deal is implemented, including whether China can meet its commitment to dramatically increase imports from the U.S., as well as possible trade diversion effects on other exporting economies,” Fitch Ratings said in a note.
Calling the deal “a big step forward," Mickey Levy, Berenberg Capital Markets' chief economist for the U.S. Americas and Asia, and U.S. Economist Roiana Reid, wrote in a note, it “goes well beyond issues of trade and tariffs and includes agreement on intellectual property, technology transfer, financial services, and exchange rate matters and transparencies, and establishes mechanisms for bilateral evaluation and dispute resolution.”
While “the tariffs and trade barriers and policy uncertainties that have marked the elongated negotiations have been costly,” Levy and Reid write, “If China and the U.S. proceed to implement this agreement, the benefits will be sizable, in the intermediate and longer-term.”
Despite the positives, “we remain concerned that while the rate on some tariffs has been reduced, tariffs will remain on a majority of goods the U.S. imports from China, and could be used by the Trump administration as leverage,” they write. “The real issue is whether China and the U.S. work together to implement the agreement.”
Also, Stifel Chief Economist Lindsey Piegza noted, “there remains considerable ground yet to be covered in terms of protecting intellectual property and counterfeit of goods among other issues before a meaningful trade agreement is met between the world’s two largest economies.”
Another reason for skepticism, she said, “China has a history of making deals and failing to follow through, and this case may be no different as the enforcement mechanism to ensure Chinese compliance remains unclear.”
The expectation is a second phase won’t happen until after the 2020 U.S. elections. “The period of review is reportedly intended to give the Trump administration time to verify China's adherence to the terms of the pact, but will also allow China to wait and know who it will be dealing with as president going forward into 2021 and beyond.”
Trade tensions easing “adds considerable upside,” Commerce Trust Company Chief Economist Scott Colbert said on the firm’s Conversations with Commerce Trust Company podcast. “The worries, of course, are the enforcement mechanisms and what we can do about it if they don't follow through.”
Plus, China won’t be able to just “start buying because it takes time to find the suppliers. It takes time to find the sellers. So, this could take a little bit of time.”
With the elections coming up, “it's pretty clear that the president probably doesn't want to raise [tariffs] again.”
Economic data
Retail sales grew 0.3% in December, the same percent gain as in November, the Commerce Department reported Thursday, while excluding autos, sales were up 0.7% in the month after a flat November.
Economists polled by IFR Markets expected the 0.3% gain in the headline number and a 0.5% rise ex-autos.
“Holiday-related spending was mixed with strong gains at apparel and accessory stores but a large miss at more traditional department stores,” Grant Thornton Chief Economist Diane Swonk said in a note. “Online sales were not as strong on a month-to-month basis as many expected.”
The Federal Reserve Bank of Philadelphia’s manufacturing survey’s general business conditions index soared to 17.0 in January — its highest level since May — from 2.4 in December, far exceeding the expected 3.8 reading.
“The survey’s indicators for current activity, new orders, shipments, and employment were all positive and increased from their readings in December,” the Fed said. “The survey’s future activity indexes remained at relatively high readings, suggesting continued optimism about growth for the next six months.”
The Labor Department said import prices gained 0.3% in December after a 0.1% climb a month earlier, while export prices fell 0.2% in the month after a 0.2% increase in November.
Economists expected import prices to grow 0.3% but saw export prices rising 0.2%.
Initial jobless claims fell to 204,000 in the week ended Jan. 11 from 214,000 a week earlier, Labor said, while continued claims dropped to 1.767 million in the week ended Jan. 4 from 1.804 million a week earlier.
Economists expected 216,000 initial and 1.720 million continued claims.
Business inventories fell 0.2% in November after a 0.1% rise in October, Commerce said. Economists expected a 0.1% dip. Business sales jumped 0.7% in November after a 0.2% decline in October.
The inventories drop was the largest since April 2017.
The National Association of Home Builders/Wells Fargo Housing Market Index slid to 75 in January from 76 in December.
“With the Federal Reserve on pause and attractive mortgage rates, the steady rise in single-family construction that began last spring will continue into 2020,” according to NAHB Chief Economist Robert Dietz. “However, builders continue to grapple with a shortage of lots and labor while buyers are frustrated by a lack of inventory, particularly among starter homes.”
Federal Reserve Board Gov. Michelle Bowman told the Home Builders Association of Greater Kansas City, “In all, the national indicators suggest a positive growth outlook for the housing sector over the next several quarters,” according to prepared text released by the Fed.
